In NY: No More Deeds-in-Lieu?
by Bruce J. Bergman
Can you still take a deed-in-lieu in New York? Probably not. This is startling, but true — confined to residential properties (one- to four-family, owner-occupied).
The admonition comes from what is known as the Home Equity Theft Protection Act, effective as of February 1, 2007. While a portion of the law relates to a special notice to be served with a summons in a foreclosure case, that is more for counsel to be concerned about. The balance of the statute (there is much here) relates to title and mortgage origination issues and so it has not been the focus of servicer alerts. It is now apparent, however, that it will impact dispositively upon the deed-in-lieu of foreclosure — hence this alert.
Among other things, the act imposes extensive contractual requirements upon the sale of a one- to four-family owner-occupied residence from a person either in default upon his mortgage or in foreclosure. The breadth of the contractual mandates and prohibitions is substantial and includes a five-day right of cancellation. In addition to the contract, there are various purchaser representations that are barred, suggesting that the equity seller (the party in default or in foreclosure) could later assert that false statements were made by the purchaser (in the instance of a deed-in-lieu, the mortgage holder), notwithstanding the usual principles that would otherwise prohibit introduction of such claimed statements.
Of equal, or perhaps greater, significance, it1 provides that where there is a material violation2, the transaction is voidable and may be rescinded by the seller (the borrower) within two years of recording the conveyance.
As a practical matter, deeds-in-lieu of foreclosure — certainly in the usual residential foreclosure — are seldom the subject of a formal contract. Rather, they are a matter of discussion, and perhaps letters. Therefore, the requirements of the Home Equity Theft Prevention Act create an atypical situation in the first instance. More than that, whether there can be compliance with the statute becomes tenuous, mindful of possible oral representation claims.
The basis for the Home Equity Theft Act could lead to the thought that it was not intended to apply to a deed-in-lieu of foreclosure, directed instead to avoid third-party scam artists from fleecing unwary homeowners out of the equity in their homes. But there is no verbatim exception for the mortgagee as purchaser. A deed from a referee in the foreclosure action is specifically mentioned. Excepted too is a sale by court order — but nothing about a deed-in-lieu of foreclosure. Even the exception for a bona fide purchaser for value may provide no comfort because of certain language specific to the unusual circumstances the statute seeks to bar. Then there is a subsection exempting “prior lienors” from the act, but it is not clear that this definitely means the mortgagee taking a deed-in-lieu.
There is also the issue of title insurance. Counsel to the mortgage holder will almost invariably recommend title insurance for the deed-in-lieu of foreclosure. (The reasons are quite compelling, although beyond the scope of this discussion.) But just as the deed-in-lieu is tenuous because of all the requirements to be met and the lurking uncertainties, so too is the availability of title insurance. If obtaining title insurance becomes questionable, the deed-in-lieu of foreclosure becomes still more unpalatable.
It is apparent that the branches of the Home Equity Theft Prevention Act (primarily RPL § 265-a) create in the residential case both burdens and perils. Whether a mortgage holder would or should exchange the relative certainty of a foreclosure sale at the conclusion of a foreclosure action for the now arduous and possibly dangerous deed-in-lieu of foreclosure is problematic at best.
Here is the proverbial bottom line, the questions to ask:
1. [RPL § 265-a(8)(a) and (b)]
2. [of subdivision three, four, six, seven or eleven of section 265-a]
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